Definition: Return on Capital Employed or RoCE essentially measures the earnings as a proportion of debt+equity required by a business to continue normal operations. In the long run, this ratio should be higher than the investments made through debt and shareholders’ equity. Otherwise diminishing returns shall render the business unsustainable. This is a better measure of financial health of a company than return on equity or RoE, because it takes into account the contribution of debt while showing the company’s return.
Description: R.O.C.E. = (Earnings from operations - interest and liabilities) / (Shareholders equity + debt)
Suppose ABC Corp had a net operating profit from operations as Rs 10,000,00. It reported in the balance sheet equity worth Rs 10,000,00 and liabilities worth Rs 2,500,00. ROCE= 10,000,00 / (10,000,00+2,500,00) = 0.8.
This means for every rupee invested in ABC Corp, the firm generates Re 0.8. From this angle, ABC Corp does not look like a financially-healthy organisation. RoCE is measured on an annual basis and plotted as a year-on-year trend line to see any noticeable change that might be occurring in the performance of the company. RoCE also has a few drawbacks. First, it tends to compare the current earnings with the book value of assets. So an organisation with depreciated assets will have more RoCE than a new organisation, even if they generate similar revenue using the same capital machinery. Profits can often be distorted using accounting policies or due to any other short-term influences. Also, for firms that do not disclose their performances to public, the RoCE data cannot be calculated accurately. Yet, using RoCE as a performance metric is considered far more useful, especially when it is used to compare a company's returns with peers operating in the same sector.

Definition: The quickest strategy in material trading is to sell a Call and buy a Put option with the same maturity. This strategy protects an investor from unfavourable downward price movements. However, the upside is also limited in case of upward movements. The Puts bought are generally of lower strike prices whereas the Calls sold have higher strike prices.
Description: Risk reversal is done for two reasons – delta hedging or options skew. Delta hedging is primarily done to protect your asset from unfavourable downward price movements. An investor will buy a Put option to protect the downside. However, to finance the purchase of the Put option, the investor also has to sell a Call option. The selling of the Call option, thus, limits the potential upside in case of any upward movement.
For example, a manufacturing organisation known as ABC purchased a Rs 100 June Put option and sold a Rs 130 June Call option at same Put and Call options, which means the premium of Put and Call are equal. Under this scheme, ABC is guarded against all price hikes and downfalls (price fluctuation) in June below Rs 100 but the profit from any price rise will also have a maximum limit of Rs 130.
Options skewing involves quoting of out-of-the-money Calls and Puts. Instead of quoting the prices, dealers quote their implied volatility levels. The greater the demand for a contract, the higher will be the price and also the volatility. Positive reversal will imply the volatility of Calls is greater than that of the Puts and, thus, it would indicate a bullish trend and vice versa.
A check that the trader has to place is what sort of implied volatility levels are suited for Calls and Puts. For example 25 per cent volatility levels may be alright for Calls but may not work out for Puts.

Definition of 'Return On Equity'

Definition: The Return On Equity ratio essentially measures the rate of return that the owners of common stock of a company receive on their shareholdings. Return on equity signifies how good the company is in generating returns on the investment it received from its shareholders.

The denominator is essentially the difference of a company's assets and liabilities. It is the amount left over if an organisation decides to settle its liabilities at a given time.

So if a firm has an ROE of say 1, it means Re 1 of common shareholding generates a net income of Re 1. This metric is especially important from an investor's perspective, as he/she uses it to judge how efficiently the firm will be able to use his/her investment to generate additional revenues.

Investors generally prefer firms with higher ROEs. However this can be used as a benchmark to pick stocks within the same sector only. Across sectors, profit and income levels vary significantly. Even within the same sector, the ROE levels may vary if a company chooses to give dividends and not keep the profit generated as idle cash.

Suppose, company XYZ has generated a profit Rs 1,00,000 and has about 1,000 shares with stockholders at a value of Rs 50 each. The board decides to issue dividend worth Rs 10,000 to the shareholders.

ROE = (1,00,000-10,000) / (1,000*50) = 1.8

This would mean that for every rupee invested in XYZ corporation, investors would generate Rs 1.8. In general terms, this looks like a high value. This can imply that XYZ was started recently and is in its fast growth stage.

Definition: Return on Capital Employed or RoCE essentially measures the earnings as a proportion of debt+equity required by a business to continue normal operations. In the long run, this ratio should be higher than the investments made through debt and shareholders’ equity. Otherwise diminishing returns shall render the business unsustainable. This is a better measure of financial health of a company than return on equity or RoE, because it takes into account the contribution of debt while showing the company’s return.
Description: R.O.C.E. = (Earnings from operations - interest and liabilities) / (Shareholders equity + debt)
Suppose ABC Corp had a net operating profit from operations as Rs 10,000,00. It reported in the balance sheet equity worth Rs 10,000,00 and liabilities worth Rs 2,500,00. ROCE= 10,000,00 / (10,000,00+2,500,00) = 0.8.
This means for every rupee invested in ABC Corp, the firm generates Re 0.8. From this angle, ABC Corp does not look like a financially-healthy organisation. RoCE is measured on an annual basis and plotted as a year-on-year trend line to see any noticeable change that might be occurring in the performance of the company. RoCE also has a few drawbacks. First, it tends to compare the current earnings with the book value of assets. So an organisation with depreciated assets will have more RoCE than a new organisation, even if they generate similar revenue using the same capital machinery. Profits can often be distorted using accounting policies or due to any other short-term influences. Also, for firms that do not disclose their performances to public, the RoCE data cannot be calculated accurately. Yet, using RoCE as a performance metric is considered far more useful, especially when it is used to compare a company's returns with peers operating in the same sector.

Definition: The quickest strategy in material trading is to sell a Call and buy a Put option with the same maturity. This strategy protects an investor from unfavourable downward price movements. However, the upside is also limited in case of upward movements. The Puts bought are generally of lower strike prices whereas the Calls sold have higher strike prices.
Description: Risk reversal is done for two reasons – delta hedging or options skew. Delta hedging is primarily done to protect your asset from unfavourable downward price movements. An investor will buy a Put option to protect the downside. However, to finance the purchase of the Put option, the investor also has to sell a Call option. The selling of the Call option, thus, limits the potential upside in case of any upward movement.
For example, a manufacturing organisation known as ABC purchased a Rs 100 June Put option and sold a Rs 130 June Call option at same Put and Call options, which means the premium of Put and Call are equal. Under this scheme, ABC is guarded against all price hikes and downfalls (price fluctuation) in June below Rs 100 but the profit from any price rise will also have a maximum limit of Rs 130.
Options skewing involves quoting of out-of-the-money Calls and Puts. Instead of quoting the prices, dealers quote their implied volatility levels. The greater the demand for a contract, the higher will be the price and also the volatility. Positive reversal will imply the volatility of Calls is greater than that of the Puts and, thus, it would indicate a bullish trend and vice versa.
A check that the trader has to place is what sort of implied volatility levels are suited for Calls and Puts. For example 25 per cent volatility levels may be alright for Calls but may not work out for Puts.